Tapping Renewable-Fuel Mandates' Brakes

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Those fires cover a lot of territory. The RFS has become a dividing line between corn growers who have seen crop prices rise with the ethanol market’s expansion. The end of cheap corn left the livestock and poultry industry grumbling over higher animal feed costs. For oil refiners, the RFS is a point of contention because it requires them to meet their obligation by either buying certificates or credits known as renewable identification numbers or buying more ethanol each year to blend with gasoline.

The Future of Ethanol

The clash of regional, financial and philosophical interests has generated frequent and often bitter fights over the future of the mandates, particularly for corn ethanol. Several governors in 2012, prompted by livestock and poultry groups, asked the EPA to reduce the 2012 and 2013 ethanol requirements. The governors said the worst national drought since 1956 had reduced corn supplies and would lead to higher animal feed prices and operating costs for animal businesses in their states. They argued that reducing the mandate would increase the amount of corn available for feed.

The EPA rejected the waiver requests, saying its research showed it was “highly unlikely” that a temporary reduction would greatly affect ethanol production or affect corn, fuel or food prices.

In January, the American Petroleum Institute scored a limited court victory on the RFS. A federal judge ruled the EPA had used an erroneous procedure in setting the 2012 mandate for cellulosic biofuels, which are made from woody plants or waste material. Actual production was far below the mandate that the EPA obligated refiners and importers to meet. The judge did not order broader changes to the RFS.

Though the RFS has survived challenges, federal renewable-fuel policy may be at a turning point. Refiners are under pressure as demand for gasoline declines, cars become more fuel-efficient and drivers hit the road less frequently. Fewer gallons of gasoline refined and less demand for ethanol, although refiners and importers remain obligated to use 13.8 billion gallons of conventional ethanol in gasoline this year. Refiners could increase the volume of ethanol beyond the 10 percent commonly blended in gasoline. The petroleum industry cites costs and concerns that engine warranties for most U.S. vehicles might be voided if drivers use gasoline with higher ethanol levels. Higher ethanol blends also would reduce the oil industry’s market share.

The EPA has approved 15 percent ethanol in gasoline in vehicles built in 2001 and later. A handful of gas stations sell E15. The American Petroleum Institute, manufacturers of gas-powered tools and small engines, livestock groups and environmental organizations continue to challenge the EPA approval.

E85, which can be pumped into “flex-fuel” vehicles, also has limited distribution.

To meet their obligations under the RFS, many refiners bought or traded renewable identification numbers. RIN values for corn ethanol rose sharply in January from 2 cents to 3 cents per RIN to a high of $1.10 in March. They are now trading around 70 cents per RIN. The surge in RIN prices drew the attention of Oregon Democrat Ron Wyden, chairman of the Senate Energy and Natural Resources Committee, who has asked the EPA to explain the volatility.